Export Controls and the Hard Case of ChinaDean Cheng

Abstract: The People’s Republic of China is a major U.S.trading partner and a potential antagonist. Thus, theUnited States has good reason to exercise some control overU.S. exports, particularly of sensitive technologies. How-ever, current U.S. export controls are often counterproduc-tive, failing to deny opponents and potential opponentsaccess to sensitive U.S. technologies, while inhibiting coop-eration with U.S. allies and placing U.S. companies at acompetitive disadvantage in the world market. The ObamaAdministration’s efforts to streamline the export control sys-tem have great merit, but need to focus on maintaining U.S.advantages, creating a nimble export control system thatadjusts quickly to technological advances, and attaining abetter understanding of the intricate connections betweenthe military and civilian sectors of the Chinese economy.

Each year, the United States exports billions of dol-lars in manufactured goods. Some of these items areexplicitly military (e.g., fighter aircraft and tanks),while others are dual-use, including advanced materi-als, computer processors, and software.

It is clearly in the interests of the United States tomaintain some degree of control over its exports, ifonly to safeguard security-related technologies anddeny them to its potential adversaries, as well as tosupport other aims such as nonproliferation. How-ever, the United States has an equally high interest insupporting a healthy U.S. economy and fosteringinternational political links, which require sustaininga robust portfolio of exports.

No. 2501December 13, 2010

Talking Points

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aid or hinder the passage of any bill before Congress.

• The Obama Administration is beginningmuch needed reforms of the U.S. export con-trol system. This effort is to be applauded, butspecial care must be taken to account for thehard case of China.

• In the Chinese system the civilian and militaryindustrial bases are extensively integrated, soexports to the civilian Chinese companies canbenefit the Chinese military.

• The current U.S. export control system hin-ders industrial cooperation with allies andU.S. exports in general, while not necessarilypreventing other states from gaining accessto sensitive technologies and processes.

• The challenge is to protect American securityinterests while maximizing business opportu-nity for exporters.

• Effective reform of current export controlsshould include identifying key areas of U.S.advantage, frequent revisions of the controls,and attaining a better understanding of theChinese military industrial complex. It is pos-sible to engage in trade with China that ben-efits both countries while protecting U.S.national security.

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These two goals, while hardly irreconcilable, attimes work at cross-purposes. This is especially truewith the People’s Republic of China (PRC). Indeed,China is arguably the crucial case for export con-trols because it is the most difficult state to address.

The PRC is both a major U.S. trading partner anda potential antagonist. The desire to limit PRCaccess to sensitive U.S. technologies therefore inev-itably collides with the interest of engaging the PRCas a trading partner. The growing assertiveness ofthe Chinese People’s Liberation Army (PLA), cou-pled with an expanding Chinese defense budget,has steadily improved the capabilities of the Chi-nese military. In the interests of hedging against thePRC as a near-peer competitor, the United Statesclearly has incentives to limit Chinese access to sen-sitive technologies.

In today’s world, however, the rise of the globalsupply chain has complicated security calculations.Purely military technologies are becoming fewer,and dual-use technologies tend to dominate. Mean-while, China has deliberately pursued a policy of“civil–military integration,” trying to maximize theinterplay between its military and civilian industrialbases. The problem is then to restrict Chinese accessto truly critical technologies, while still reaping thebenefits of free trade.

This is further complicated by the flawed systemof U.S. export controls. Byzantine rules, fragmentedoversight, and often outdated definitions hampertrade as much as they restrict access to sensitivetechnologies. As the Administration seeks to addressthese problems by overhauling the export controlsystem, it should explicitly state the reasoningbehind the export restrictions, require regularreevaluations of which goods are subject to exportcontrols, and try to better understand the intricaciesof China’s military and civilian industrial complexes.

This study analyzes the U.S. export control sys-tem with special regard to the PRC. It first reviewssome of the unique difficulties posed by the PRCand its military industrial complex because any

reform of export controls will need to take intoaccount Chinese characteristics. It will then exam-ine the current export control legislation and offerrecommendations for reforming the current system.

The Need for Export Controls During the Cold War

Export controls became a matter of U.S. andallied foreign policy early in the Cold War. Con-fronted by a hostile Soviet Union, the Westernnations agreed in 1949 to form the Coordinat-ing Committee for Multilateral Export Controls(CoCOM) to limit Soviet access to Western technol-ogy. Although CoCOM was not backed by a formaltreaty, the 17 members of CoCOM agreed to operateby “consensus,” in which “any member…[had] aveto over the export by any other member of a con-trolled good or technology,” as established by theCoCOM Secretariat.1

While CoCOM was not always successful, it didhelp to establish certain baselines among Westernand other allied nations as to what could beexported to the USSR and its allies and, equallyimportant, what should not. However, its successwas largely rooted in the common understanding ofCoCOM members and the several cooperatingstates about the USSR’s generally hostile nature andthe need to cooperate to limit technology transfer.

The nature of the USSR and its policies facilitatedthis cooperation. The Soviet Union was an autarkicstate, uninterested in establishing a significant eco-nomic relationship with the United States specifi-cally or the West as a whole. Moreover, the USSRwas fundamentally hostile to the Western democra-

1. CoCOM had 17 members: Australia, Belgium, Canada, Denmark, France, Germany, Greece, Holland, Italy, Japan, Luxembourg, Norway, Portugal, Spain, Turkey, the U.K., and the United States. Richard F. Grimmett, “Military Technology and Conventional Weapons Export Controls: The Wassenaar Arrangement,” Congressional Research Service Report for Congress, September 29, 2006, p. 1, at http://www.fas.org/sgp/crs/weapons/RS20517.pdf (November 22, 2010).

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The combination of a clear threat and Soviet autarky helped to create a consensus among the Western nations about the need to monitor exports carefully, lest the Soviets obtain key technologies.

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cies. Consequently, even when trade relationshipswere established with the Soviets in the 1970s inareas such as grain, a high degree of wariness per-sisted, not only in Washington, but also in Bonn,London, Tokyo, and Paris.

This combination of a clear threat and Sovietautarky helped to create a consensus among theWestern nations about the need to monitor exportscarefully, lest the Soviets obtain key technologies.Hence, CoCOM was created. CoCOM also helpedto reduce fears that other states might gain financialadvantages by breaking export controls to furthersales. It essentially created a more level playing fieldamong the major Western economic powers in sell-ing technology to the USSR.

In the bilateral context, export controls succeededbecause there was minimal U.S.–Soviet interactionin general commerce and trade. The USSR did notwant to trade with the U.S., although it desired accessto advanced technology, nor did it have much tooffer the United States that could not be obtainedfrom the global marketplace. Consequently, the U.S.incurred no real opportunity cost in restrictingexports to the Soviets. The Soviet market for U.S.and Western goods was small, and U.S.–Soviet inter-actions were largely confined to the military andsecurity realm. There was no real political downside inthe United States to restricting trade with the USSR.

In short, export controls against the USSRimposed relatively few political and economic costson the United States and its allies, while generatingclear security benefits. In today’s world, export con-trols exhibit a similar dynamic. Indeed, the Was-senaar Arrangement, established in 1996 as thesuccessor to the CoCOM structure, focuses onstates that are politically isolated and economicallymoribund, including Iran, Libya, North Korea,Syria, and Burma.2

China: A Different, Harder CaseThe People’s Republic of China represents a far

more difficult proposition in export controls. First,

the PRC is not the former Soviet Union. The PRC isnot an implacable foe of the United States, consis-tently and broadly acting in ways to impede U.S.interests. Rather, Beijing is pursuing its ownnational interests, which often run counter to U.S.interests. At other times, they are congruent.

Furthermore, China is most certainly not anautarkic nation. The United States and China havesignificant economic interrelationships. In 2009,U.S. exports to China totaled $69.5 billion, andimports from China totaled $296.4 billion. Data forthe first half of 2010 indicate that bilateral trade willbe even greater than in 2009.3 This trade involves avariety of goods. Major U.S. exports to Chinainclude not only agricultural products, especiallysoybeans, but also electrical machinery, plastics,and aircraft.4 Meanwhile, the U.S. imports varioustypes of machinery and electrical equipment fromChina and a wide range of consumer goods. Dispar-ate elements in both countries therefore have aninterest in sustaining economic ties.

These economic ties, coupled with the securityantagonisms that are muted compared with pastantagonisms with the USSR, have created a dynamicin which national security requirements and eco-nomic benefits are not necessarily aligned, unlike inthe prior U.S. relationship with the Soviet Union.Indeed, substantial segments of the American pop-ulation, including many consumers, would stand tolose if overall trade were restricted. Ending U.S.trade with the PRC is simply impossible withoutinflicting substantial economic costs on both sides.

Further complicating the situation are China’srelationships with American allies. China has exten-sive economic ties with the U.K., Germany, France,and many other Western nations and poses less of asecurity challenge to them. Not surprisingly, China

2. Ibid., p. 4.

3. U.S. Census Bureau, “Trade in Goods (Imports, Exports and Trade Balance) with China,” November 10, 2010, at http://www.census.gov/foreign-trade/balance/c5700.html (November 22, 2010).

4. Office of the U.S. Trade Representative, “China,” at http://www.ustr.gov/countries-regions/china (November 22, 2010).

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In 2009, U.S. exports to China totaled $69.5 billion, and imports from China totaled $296.4 billion.

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is not one of the “countries of interest” in the Was-senaar Arrangement. Indeed, few states are likely topress for applying the agreement to the PRC inabsence of a pressing threat from Beijing.5 “None ofthe participants in the [Wassenaar] process appearsto favor the types of strong controls—and U.S.dominance—that existed under CoCOM.”6

This suggests that, unless carefully thought out,any U.S. attempt to impose unilateral export con-trols on the PRC would likely fail to prevent Beijingfrom obtaining comparable technologies from U.S.competitors, while costing American manufacturersjobs and sales. On the other hand, a clear set of con-trolled exports might allow the U.S. to presentEuropean and Japanese exporters with an opportu-nity to expand their participation in the U.S.defense market in exchange for tighter controls overthe listed technologies and processes.

Regrettably, the structure of U.S.–PRC tradeimposes certain vulnerabilities on the United States.Although some of the largest exports from theUnited States to China are commodities, such ascotton, malt, beer, and soybeans, the highest valueexports include semiconductors and associatedequipment ($5.27 billion in 2009); aircraft, includ-ing engines, equipment, and parts ($5.33 billion);and broadcasting equipment and instruments forelectronic and electrical testing ($1.18 billion).7

Much of this equipment, especially semiconductorsand aircraft parts, is shipped to China for assemblyinto finished goods. They therefore hold distinctdual-use potential. Consequently, even as the U.S. istrading with the PRC, it is also potentially benefitingthe PLA and therefore may be weakening U.S.national security.

Security Concerns with China. This situationis further exacerbated because of fundamental prob-lems in the broader Sino–American relationship.While the PRC and the U.S. are not engaged in a

cold war, conflicting interests and growing mutualsuspicion are leading to increasing unease on bothsides about security issues. The perennial issue ofarms sales to Taiwan highlights this unease.

The United States remains bound by the TaiwanRelations Act to provide Taiwan with the means todefend itself. On the other hand, Beijing views suchsales to what it still calls a “renegade province” asillegitimate. More to the point, China refuses tocommit itself to a peaceful resolution of the cross-strait issue. Until the Taiwan issue is resolved, thereis an ongoing possibility the United States could bedrawn into a conflict across the Taiwan Strait.

Nor is Taiwan the sole issue of concern. Chineseforeign policy toward many of its neighbors isincreasingly assertive. Chinese naval forces havebeen exercising near the Senkaku islands, whichboth China and Japan claim. Meanwhile, Beijing hasbeen expanding its capabilities in the South ChinaSea. More recently, advanced PLA Air Force fightershave been deployed along the Indian border, andChinese troops are reportedly in Pakistani Kashmir.8

Many of China’s neighbors are also U.S. allies, andthe threat these moves pose to core American inter-ests, such as freedom of the seas, only increases fric-tion between Washington and Beijing.

China’s increasingly muscular foreign policy issupported by an increasingly capable People’s Lib-eration Army. Displays of modern aircraft, war-ships, and armored vehicles highlight the PLA’simprovements—the product of nearly two decadesof double-digit growth in the official Chinese mili-

5. In this regard, increased Chinese cyber attacks and cyber espionage aimed at these nations will likely alienate them from the PRC and increase the potential that they would join in restricting PRC access to some of their technologies.

6. Grimmett, “Military Technology and Conventional Weapons Export Controls,” p. 5.

7. U.S. Census Bureau, “U.S. International Trade Statistics: Value of Exports, General Imports, and Imports by Country, by 6-digit NAICS, China (5700), through December 2009,” at http://censtats.census.gov/naic3_6/naics3_6.shtml (December 7, 2010).

8. Dean Cheng and Lisa Curtis, “China’s Indian Provocations Part of Broader Trend,” Heritage Foundation WebMemo No. 3007, September 9, 2010, at http://www.heritage.org/research/reports/2010/09/chinas-indian-provocations-part-of-broader-trend.

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While the PRC and the U.S. are not engaged in a cold war, conflicting interests and growing mutual suspicion are leading to increasing unease on both sides about security issues.

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tary budget.9 China’s expanding economy has alsoprovided the resources for supporting improvementsin less visible capabilities, such as the command,control, communications, computers, intelligence,surveillance, and reconnaissance (C4ISR) systemsand platforms necessary to provide the PLA withthe ability to fight “local wars under informatizedconditions.”

China has also rapidly increased its space capa-bilities. China’s test of an anti-satellite weapon in2007 and the recent rendezvous of two satelliteshint at growing space warfare capabilities. Mean-while, Beijing’s growing ability to conduct informa-tion warfare, including computer network attackand cyber espionage, has aroused concern, espe-cially after Google was hacked.10 Many of the tech-nologies associated with these new systems are notpurely military, but have legitimate commercial andcivilian applications. Chinese access to advancedWestern technology therefore continues to haveboth security and economic implications.

Civil–Military Integration: A Constant Chi-nese Policy Priority. The issue of growing Chinesemilitary capability intersects with U.S. trade policyand the question of export controls because of thelong-standing Chinese emphasis on integrating itsmilitary industry with the broader national econ-omy. As the national economy grows and becomesmore sophisticated, the Chinese have tried toensure that the military technological and industrialbase also benefits. In particular, Beijing has tried tominimize barriers to the flow of technology, train-ing, and information between the military andbroader civilian economies.

In general, the more integrated a given Chinesedefense industrial sector is with Chinese civilian

and global production and with the research anddevelopment (R&D) chain, the more progress themilitary sector has made.11 Thus, China’s ship-building industry has benefited distinctly fromaccess to foreign technical assistance, managementtechniques, and investment to the point that a U.S.Defense Department report suggests that China willsoon be able to build its own aircraft carriers.12

“Imported equipment, R&D expertise, improvedmanagement skills, and modern design methodshave raised the level of capabilities of many ofChina’s major shipyards.”13

Nor is this a new interest. Ever since its founding,the People’s Republic of China has pursued a policyof “combine the civilian and the military, combinepeacetime and wartime” (junmin jiehe, pingzhanjiehe). Under Mao Zedong (1949–1976), this policywas aimed at providing the military with access to, ifnot control over, the entire national economy. Such apolicy was essential because Mao was convinced thatChina faced the prospect of “early war, major war,nuclear war.” To be prepared to fight and win theimminent war, the military required priority accessto all of the nation’s resources. Throughout Mao’srule, emphasis was therefore placed on military pro-duction and incorporating civilian production linesinto military planning.14

Under Deng Xiaoping, Chinese prioritieschanged. Deng’s policy of “Reform and Opening”downgraded the military in favor of producinggoods for the broad Chinese population. Manystate-owned enterprises, especially those orientedtoward military production, were disbanded. Inmany cases, their physical plants were shifted to thecities, especially to the coasts. The top leadershippushed for conversion of China’s military industrial

9. Dean Cheng, “The PLA on Parade: There’s More Than What Meets the Eye,” The Wall Street Journal, September 28, 2009.

10. William Jackson, “How Google Attacks Changed the Security Game,” Government Computer News, September 1, 2010, at http://gcn.com/articles/2010/09/06/interview-george-kurtz-mcafee-google-attacks.aspx (November 22, 2010).

11. U.S. Department of Defense, “Military and Security Developments Involving the People’s Republic of China,” 2010, pp. 43–45.

12. Ibid., pp. 2 and 48.

13. Evan S. Medeiros, Roger Cliff, Keith Crane, and James C. Mulvenon, A New Direction for China’s Defense Industry, RAND Corporation, 2005, p. 140, at http://www.rand.org/pubs/monographs/2005/RAND_MG334.pdf (November 22, 2010).

14. Ling Shenyin, Peng Aihua, and Zou Shimong, “Reflections and Considerations of the Development of Civil–Military Melded Development,” Zhongguo Junshi Kexue (China military science), No. 1, 2009.

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base and shifted resources away from military pro-duction to meeting growing civilian demand.15

Where Mao had modeled China’s military indus-trial infrastructure after the Soviet Union’s, Dengspecifically rejected that model. While useful forindustrializing a backward country, the Sovietapproach did not necessarily promote technologicaldevelopment or innovation.16 To accommodatethese shifting priorities, Deng modified Mao’s guid-ance on the relationship between the military andcivilian industrial bases. Deng’s new 16-characterphrase of “combine the civilian and the military,combine peacetime and wartime, give preference tomilitary products, have the civilian support the mil-itary” (junmin jiehe, pingzhan jiehe, junpin youxian, yimin yangjun) has been considered the “guidingthought” (zhidao sixiang) for China’s military indus-trial development ever since.17

Under this guiding thought, the Chinese leader-ship has avoided the Soviet pitfall of excessivelyemphasizing the military to the exclusion of thecivilian economy. Indeed, under Deng, there wassome concern that military industry officials werefocused too much on making money and notenough on manufacturing military equipment.18

Jiang Zemin, Deng’s successor, sustained anddeepened Deng’s policy of making civilian eco-nomic and technological development the first pri-ority, while promoting civil–military integration.Like his predecessor, Jiang modified the guidancefor civil–military integration by creating the phrase“combine the military and the civilian, combinepeacetime and wartime, embed the military withinthe civilian” (junmin jiehe, pingzhan jiehe, yujunyumin). This new guidance firmly subordinated mil-itary industrial production and modernization tothe larger effort of improving the national economy.

Jiang is said to have specifically rejected the idea offavoring the military sector over the civilian sec-tor.19 At the same time, the Chinese leadership rec-ognized that military modernization could not bedeferred indefinitely. Under Jiang, there was there-fore a push to spread the benefits of the expandingand increasingly technologically sophisticated Chi-nese economy to the PLA.

The result was a further extension of civil–mili-tary integration. One aspect of this was coordinatingmilitary and civilian development, thereby reducingredundancies, but also increasing synergies betweenthe two sectors. In particular, greater import wasplaced on nurturing more dual-use technologiesand fostering a freer flow of information betweenthe military and civilian sectors. Military researchand development would be embedded in the overallnational infrastructure, lending its expertise whereapplicable while drawing on the full range ofnational resources. Meanwhile, civilian develop-ments would be coordinated with military require-ments, so that the entire economy would potentiallybe available in the event of conflict.20

By the time that Hu Jintao became Party GeneralSecretary and President of the PRC in 2002, theseefforts at expanding civil–military integration hadbeen underway for more than a decade. Hu hassought to build on these efforts in achieving theaim of “rich nation, strong army” (fuguo qiangjun).Recognizing the increasingly linked nature of hightechnology in particular, Hu emphasized increas-

15. For more extensive discussion, see Barry Naughton, Growing Out of the Plan: Chinese Economic Reform 1978–1993 (New York: Cambridge University Press, 1996), passim.

16. Ling et al., “Reflections and Considerations of the Development of Civil–Military Melded Development.”

17. “Build a Complete Civil–Military Joined, Military Embedded in the Civilian Military Equipment Research, Development, and Production System,” Jiefangjun Bao (PLA daily), February 23, 2008, at http://www.chinamil.com.cn/site1/xwpdxw/2008-02/23/content_1135060.htm (November 22, 2010).

18. Ling et al., “Reflections and Considerations of the Development of Civil–Military Melded Development.”

19. Ibid.

20. Ibid.

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The Chinese leadership has avoided the Soviet pitfall of excessively emphasizing the military to the exclusion of the civilian economy.

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ing the interplay between military and civilian,leading to “melded development” (ronghe fazhan) ofthe military and larger civilian technological andindustrial bases.

This melding extends beyond simply having mil-itary production lines producing civilian goods orincorporating civilian technology into military sys-tems. The goal is for civilian and commercialauthorities to incorporate military requirementsinto their products and processes, while militarydesigners exploit commercial products and pro-cesses in their own output. As one author suggests,the goal is synchronized innovation between themilitary and civilian/commercial worlds.21 Ulti-mately, this “organic” integration and meldingwould effectively make potentially the entire Chi-nese economy available for military productionwithout skewing it away from civil and commercialends in peacetime.22

Civil–Military Integration: A Variety of Means.Clearly, the top Chinese leadership has consistentlysupported civil–military integration for much of thepast 30 years, although with different emphases.Chinese policies have both mirrored this supportand evolved alongside the changes. Such anextended policy of civil–military integration meansthat the military industrial base is embedded withinthe larger civilian economy and that many policiespromoting this integration are embedded in the core

of China’s economy. Therefore, interactions withChina’s commercial industry, depending on how andwith which entities those interactions occur, havethe potential to benefit the Chinese military.

Several Chinese efforts highlight the differentways in which Beijing has pushed civil–militaryintegration.

Research into Basic Dual-Use Technologies. Oneelement has been the promotion of basic research inareas that have both military and civilian benefits.The National High-Technology Research and Devel-opment Plan (guojia gao jishu yanjiu fazhan jihua) orPlan 863 is a key program that arose under DengXiaoping and that continues to affect Chinese mili-tary industrial efforts. Plan 863 was the first majorChinese initiative aimed at fostering science andtechnology. It was begun in March 198623 and hasserved as a key blueprint for major Chinese R&Defforts into general science and technology, espe-cially high technology.

Although Plan 863 is not a military initiative, thefields emphasized under its aegis are dual-use innature. For example, aerospace systems can serveboth military and civilian ends. Similarly, new mate-rials can be employed in a variety of commercialproducts as well as in modern warships, combat air-craft, and armored fighting vehicles.

Nor are just the outputs of Plan 863 dual-use.While aimed at improving the overall level of Chi-nese high technology, the program incorporates sci-entists and engineers from the military industrialcomplex “to ensure that defense requirements aretaken into consideration and to identify and gainaccess to any technologies that may be useful formilitary applications.”24 As such, Plan 863 embod-

21. Hu Guangzhen, “Melded Civil–Military Development: Vital Strategic Thoughts Regarding the Planning of National Defense and Economic and Social Development,” Zhongguo Junshi Kexue, No. 1, 2009.

22. Ibid.

23. The program initially supported 15 projects in seven high-tech fields: biology, aerospace, information technology, lasers, automation, energy resources, and new materials. In 1996, marine technology was added to the program. Material drawn from Guojia Gao Jishu Yanjiu Fazhan Jihua 863, in FBIS-CHI, July 21, 2000, and Xinhuanet, “What Is Plan 863?” China.com.cn, February 15, 2001, at http://www.china.com.cn/chinese/2001/Feb/20835.htm (December 7, 2010). For further discussion of the creation of Plan 863, see Evan Feigenbaum, China’s Techno-Warriors: National Security and Strategic Competition from the Nuclear to the Information Age (Stanford, Calif.: Stanford University Press, 2003), esp. pp. 141–143.

24. Tai Ming Cheung, Fortifying China: The Struggle to Build a Modern Defense Economy (Ithaca, N.Y.: Cornell University Press, 2009), pp. 80–81.

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Interactions with China’s commercial industry, depending on how and with which entities those interactions occur, have the potential to benefit the Chinese military.

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ies the idea of fostering linkages and the free flow ofinformation and talent between the civilian anddefense industrial bases.

Applying Civilian/Commercial Technologies toMilitary Systems. Civil–military integration in theChinese context also involves the cross applicationof technologies at the factory floor and designlevels. China’s shipbuilding industry, which manu-factures both commercial vessels and modern war-ships, has benefited from access to foreign methodsand techniques.

Similarly, the FC-1 fighter aircraft has reportedlybenefited from computer-aided design/computer-aided manufacturing (CAD/CAM) technologies.25

Application of commercial technologies not onlycan accelerate research, development, and produc-tion, but also reduce risk. Civilian technology, espe-cially in information technology (IT), often maturesfaster and is produced on a larger scale, allowing thekinks to be worked out on the commercial side.

While some of this involves the porting of civil-ian and commercial technologies to military prod-ucts, another aspect is “the use of civilian entities toconduct military work because they are more capa-ble than the military.”26 This is of particular note ininformation technology. As a RAND study notes,most major Chinese IT and electronics companiesare commercial businesses. That is, they are compa-nies pursuing sales both nationally and internation-ally that are not under PLA direction.

For many of these companies, their primary tieto the Chinese military is as a supplier of militaryelectronics and equipment. However, some compa-nies have long-standing institutional links, such asties or access to the PLA’s numbered research insti-

tutes.27 Such ties effectively subsidize these compa-nies’ research, while probably giving military R&Daccess to commercial best practices and cutting-edge research. Particularly in IT, commercial ad-vances are likely to outpace military R&D.

Commercial Subsidiaries of Military Industries.Another aspect of civil–military integration hasbeen the development of commercial subsidiarieswithin the larger Chinese arms industry.28 Suchsubsidiaries help to provide China’s military indus-try with access to foreign partners and customersinterested in both military and nonmilitary goods.At the same time, they potentially provide that sameindustry with access to foreign technologies throughthose same partners and customers.

One example is China Great Wall Industry Corpo-ration (CGWIC). CGWIC is part of the China Aero-space Science and Technology Corporation (CASC), astate-owned enterprise that is one of the two maincomponents of China’s space-industrial complex.CASC has close links to the Chinese military—one ofthe main customers for many of its products.

Established in 1980, CGWIC is the “sole com-mercial organization authorized by the Chinesegovernment to provide satellites, commercial launchservices, and to carry out international space coop-eration.” According to the company’s Web site, it

25. Ibid., p. 200.

26. Medeiros et al., A New Direction for China’s Defense Industry, p. 207.

27. Ibid., p. 206, and James Mulvenon, Soldiers of Fortune (Armonk, NY: M.E. Sharpe Publishers, 2001), pp. 186–191. Examples include China Electronic Technology Group and Zhongxing Telecommunications Equipment Co. James Mulvenon and Rebecca Samm Tyroler-Cooper, “China’s Defense Industry on the Path of Reform,” U.S.–China Economic and Security Review Commission, October 2009, pp. 24 and 36, at http://www.uscc.gov/researchpapers/2009/DGI%20Report%20on%20PRC%20Defense%20Industry%20--%20Final%20Version%20_with%20USCC%20seal_%2002Nov2009%20_2_.pdf (November 22, 2010).

28. Note that this section is discussing subsidiaries of state-owned enterprises, and not companies run by the PLA itself. Indeed, since 1999, the PLA has divested itself of most of its businesses, aside from those in the telecommunications field. Mulvenon, Soldiers of Fortune.

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The long-standing Chinese civil–military integration efforts coupled with the opacity of many Chinese organizations suggests that blocking the flow of sensitive technology to specific Chinese entities will be extremely difficult.

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can not only arrange the export of satellites and pro-vide commercial launch services, but also provideproject financing, project insurance, and technicaltraining for related support personnel. CGWIC isalso involved in a host of non-space areas, includinginformation and electronic systems, petroleum andpetrochemicals, and green energy.29

Such measures will likely be redoubled, givenPresident Hu Jintao’s emphasis on melding militaryresearch, development, and production systems.The long-standing Chinese civil–military integra-tion efforts coupled with the opacity of many Chi-nese organizations suggests that blocking the flowof sensitive technology to specific Chinese entitieswill be extremely difficult.

Difficulties with U.S. Export Controls. Fur-ther complicating the export control situation withthe PRC are American issues. For much of the ColdWar, controlling exports to the PRC was not apressing concern. Prior to President RichardNixon’s visit to China in 1972, there was no realprospect of U.S. exports to China. The PRC waseven more hostile and closed to the United Statesthan the USSR. Even after relations were revived,export controls were not a major issue because theWest and the PRC were closely aligned in facingdown the Soviet Union. Moreover, China wasapparently not interested in military expansion atthe time and instead was reducing its military. Lim-iting Chinese access to technology was subordi-nated to the higher priority of containing the USSR.Instead, the U.S. and other Western countriesactively sought to export arms and military-relatedtechnology to the PRC, including artillery-locatingradars and anti-submarine torpedoes.30

However, interest in sustaining cooperation andtechnology transfer to the PRC evaporated with theTiananmen massacre in 1989. U.S. exports of hightechnology to China were curtailed, and majorcooperative defense programs were allowed tolapse. Then, with the collapse of the USSR and therapid acceleration of China’s economy, the interestin export controls reemerged with a vengeance. In

the 1990s, China was uneasily viewed as a potentialnear-peer competitor. By the new millennium, itbecame clear that the PRC was not following theJapanese path of being a mostly peaceful nationwith limited military ambitions. China’s efforts tokeep its decision-making processes as opaque aspossible reinforced this perception.

China’s growing military capabilities, coupled withits substantial diplomatic and economic clout, haverevived concerns about technology transfer to thePRC. Export controls are seen as an essential means oflimiting PRC access to cutting-edge technologies.

The Current U.S. Export Control System.Regrettably, the current U.S. export control regimeis out of date and out of step with technological real-ities. Few U.S. allies are likely to join a strict regimeaimed at denying China all access to advanced tech-nology. This is crucial because many European andAsian states now have technological capabilitiescomparable to the U.S. in important fields. Withoutbroad agreement on an export control regime, uni-lateral American efforts will affect only Americanexports, without actually curtailing Chinese accessto many forms of high technology.

Even in areas in which the U.S. is dominant, theU.S. export control structure is deeply flawed. Incontrast with China’s efforts to create an integratedcivil–military defense industrial base, the U.S.export control regime is highly fragmented. The twomajor elements of the current regime are the Muni-tions List, under the jurisdiction of the U.S. StateDepartment and governed by the International Traf-fic in Arms Regulations (ITAR), and the CommerceControl List (CCL), under the jurisdiction of theU.S. Department of Commerce and governed by theExport Administration Regulations. American indus-try seeking to export high-tech items are thereforeconfronted by two different lists, administered by

29. China Great Wall Industry Corporation, “About Us,” at http://www.cgwic.com/about (November 22, 2010).

30. Bates Gill and Taeho Kim, China’s Arms Acquisitions from Abroad: A Quest for “Superb and Secret Weapons” (New York: Oxford University Press, 1995), p. 42.

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The current U.S. export control regime is out of date and out of step with technological realities.

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two different bureaucracies, each with its ownlicensing rules, reporting requirements, and over-sight authorities.

International Trade in Arms Regulations. ITARgoverns exports of a range of specialized, military-use goods labeled “defense articles.” The regula-tions were established under the Arms ExportControl Act of 1976 and the State Department’sDirectorate of Defense Trade Controls is responsi-ble for enforcement.

In general, these regulations focus more onnational security than on maximizing exports orcommercial concerns. Not surprisingly, ITAR-con-trolled items are subject to stringent scrutiny beforepermission is granted to export.

Some items covered by ITAR are expected, suchas actual weapons systems and classified informa-tion associated with various defense articles. How-ever, ITAR also applies to all subsystems and evenindividual parts that were designed or modified formilitary use. For example, legislation that placedsatellites and their subsystems under ITAR effec-tively make every nut and bolt subject to the Muni-tions List.

In addition, ITAR applies to technical data ondefense articles, including information on thedesign, development, production, manufacturing,and assembly of defense articles. ITAR also appliesto information on their operation, repair, testing,maintenance, and modification, including software.This makes any change to software a potential ITARissue that requires review.

Moreover, the Munitions List restricts the trans-fer of technical data on defense articles by any thirdparty or to any third party:

[V]irtually any technical data related in anyway to a defence article is ITAR-controlled. Ifan Australian entity receives such data, it

must control it in strict compliance withITAR, which includes a prohibition on “re-export” unless expressly approved by theDirectorate.31

The export of any item of equipment or subcom-ponent, piece of data, and/or service may requireseparate approval by the directorate prior to export.Nor does “export” in this context refer only to thetransfer of physical items outside one’s borders. Italso applies to the transfer of information, such asby e-mail.

Export Administration Regulations. Export Admin-istration Regulations (EAR) govern the export andre-export of commodities, software, and technologythat have both military and commercial or civilianapplications. In most instances, they also covercommercial items that are not of immediate militaryutility.32 The Department of Commerce’s Bureau ofIndustry and Security (BIS) is responsible forenforcing EAR.

The legal authority for EAR was originally basedon the Export Administration Act of 1979, whichexpired in 2001. Since then, export controls overdual-use items have been extended each year byexecutive order.

Under EAR, as with ITAR, exporters are expectedto determine whether their products require alicense prior to exporting them. With EAR, thatdetermination is based on a number of factors,“including the item to be exported and the countryof ultimate destination.”33 Even though exportersare being compelled to determine whether theirgoods are subject to export controls, the BIS itselfcannot determine whether its export control systemis actually limiting foreign access to high technol-ogy. BIS lacks metrics for assessing the effectivenessof its controls, and its watch lists are often incom-plete in listing parties of interest.34

31. Roland L. Trope and Monique Witt, “Allies at Sixes and Sevens: Sticky Issues in Australian–US Defence Trade Controls,” Security Challenges, Vol. 3, No. 2 (June 2007), at http://www.securitychallenges.org.au/ArticlePages/vol3no2TropeandWitt.html (November 22, 2010).

32. U.S. Department of Commerce, Bureau of Industry and Security, “Introduction to Commerce Department Export Controls,” at http://www.bis.doc.gov/licensing/exportingbasics.htm (November 22, 2010).

33. U.S. Government Accountability Office, “Export Controls: Improvement to Commerce’s Dual-Use Export Controls Needed to Ensure Protection of U.S. Interests in the Post-9/11 Environment,” GAO–06–638, June 2006, p. 1.

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In short, corporations are forced to comply witha system that may not actually prevent hostile statesfrom obtaining access to sensitive dual-use items.

The Impact of Current Export Controls on U.S. Industry

The complex and confusing system of U.S.export controls may not actually restrict access offoreign countries, including the PRC, to sensitivemilitary and dual-use technologies. Some items willlikely slip through the cracks, especially given thevagaries of precisely which list and sanctions applyto which technologies:

Some sanctions and embargoes only apply toitems on State’s U.S. Munitions List and notto those on the Commerce Control List. Forexample, Commerce-controlled items maybe exported to China while arms exports toChina are generally prohibited.35

Meanwhile, the State Department and the Com-merce Department do not necessarily share infor-mation with each other, even in cases of violationsof their respective regulations. As a result, violatorsof one set of rules are not automatically subjected toincreased scrutiny under the other set.36

In some cases, it is unclear whether the restrictedtechnologies are meaningful. A commonly citedproblem with both the Munitions Control List andthe Commerce Control List is that the prohibitionsare rarely reviewed. The CCL, for example, has notbeen revised in over 15 years.37 This is especiallyimportant for information technology. In light ofMoore’s Law, which observes that the density oftransistors on a chip roughly doubles every 24months, IT becomes much more capable withina matter of two or three years. Unless regularlyreviewed, export restrictions on specific IT equip-ment rapidly fall behind the state of the technology.

Meanwhile, these same regulations often compli-cate cooperation with allies. For example, the U.K.and Australia have at times found themselves sub-jected to export control policies, even on jointprojects, which have been approved by both the U.S.government and the U.K. or Australian government.One assessment observed, “ITAR compliance obliga-tions will become a significant obstacle to effectiveAustralian and U.S. military interoperation.”38 Therecently ratified U.S.–U.K. and U.S.–Australia trea-ties on defense trade cooperation, which allows thetransfer of certain defense items and servicesbetween Americans and authorized U.K. or Austra-lian citizens without export licenses or ITAR controlsare essential first steps in correcting this problem.

In other cases, erstwhile allies seek to exploitU.S. export controls to expand their own marketshare. Thales, a French aerospace manufacturer, hasproduced a number of “ITAR-free” systems thatincorporate no U.S. components and can thereforebe exported freely, including to the PRC. The com-pany manufactured Sinosat-6B for the PRC and theW3C telecommunications satellites to this specifi-cation.39 For the W3C satellites, it allowed Eutelsatto use Chinese launchers to place the satellite inorbit, ironically arranged through China Great WallIndustry Corporation. Meanwhile, Thales is alsoadvertising helicopter air data units to the sameITAR-free specifications.40

These deficiencies in the American export controlregime do not deny the PRC or other states access to

34. For example, see ibid., p. 8.

35. Ann Calvaresi Barr, “Export Controls: State and Commerce Have Not Taken Basic Steps to Better Ensure U.S. Interests Are Protected,” statement before the Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia, Committee on Homeland Security and Governmental Affairs, U.S. Senate, April 24, 2008, p. 5.

36. U.S. Government Accountability Office, “Export Controls,” p. 3.

37. National Defense Industries Association, “Export Control Review Principles and Recommendations,” January 13, 2010, at http://www.ndia.org/Advocacy/LegislativeandFederalIssuesUpdate/Documents/xconrecosfinal_110.doc (December 7, 2010).

38. Trope and Witt, “Allies at Sixes and Sevens.”

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The complex and confusing system of U.S. export controls may not actually restrict access of foreign countries, including the PRC, to sensitive military and dual-use technologies.

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advanced technology, but they do deny Americancompanies potential clients and market shares.

Proposed Changes to the Export Control System

The Obama Administration has proposed anumber of changes to streamline the export controlsystem,41 including:

• A single control list that distinguishes in tiers thesensitivity of items and technologies,

• A single licensing policy to be applied acrossagencies,

• A new center to better coordinate the variousagencies, and

• A single IT system to share information amongthe relevant agencies.42

Some of these proposals have a great deal of merit.In particular, there is a clear need to improve coordi-nation and information sharing among the variousagencies and departments charged with enforcingexport controls. Improving information flow will notonly help to seal some of the cracks in the current sys-tem, but also almost certainly reduce redundanciesand increase efficiency in enforcement.

However, these efforts should be undertakenregardless of the Chinese issue. These are predomi-nantly internal concerns that affect exports to U.S.allies as much as they affect exports to the PRC.

What is far more problematic is whether a newagency will necessarily help to achieve the sameends. Creating a new, tiered control list and a licens-ing policy to enforce the list is intended to differen-tiate critical from non-critical technologies andtrusted partners from less close customers, but how

dual-use technologies will be treated in the licens-ing process remains to be seen, especially given thegrowing importance of software and IT in modernweapons and warfighting. Moreover, the proposedfix gives little indication of how exporters areexpected to safeguard potentially militarily usefultechnologies when dealing with the integrated Chi-nese industrial complex. Indeed, none of the pro-posed fixes directly addresses the conundrum oftrading with the PRC while hedging against furtherimprovements in the PLA.

What the U.S. Should DoAny U.S. export control effort must protect U.S.

interests while maximizing business opportunityfor exporters. The export controls must specificallybe able to address the challenges posed by China’slong-standing interest in civil–military integrationand the PLA modernization effort.

Several steps seem essential.

Determining What Matters. A military adageteaches that he who seeks to defend everythingdefends nothing. While the U.S. continues to be amajor technological innovator, it is neither the solesource nor even the best source in many cases. Con-sequently, U.S. policymakers need to recognize thatthe U.S. cannot deny China or almost any othernation access to more advanced technology. How-ever, the American advantage is often not only anissue of hardware, but also an issue of skills, suchas project management, systems integration, andsystems engineering. Indeed, the 1990s Loral andHughes aerospace export cases, which precipitatedthe shift of satellite exports to the U.S. MunitionsList, centered in part on the possibility that “thePRC may have transferred the lessons learned from

39. Peter B. de Selding, “China Launches New Communications Satellite,” Space News, July 6, 2007, at http://www.space.com/missionlaunches/070706_chinasat6b_lnch.html (November 22, 2010), and “Eutelsat Shifts W3B Satellite from Chinese to European Launcher,” Space News, February 18, 2010, at http://www.spacenews.com/satellite_telecom/2010-02-18-eutelsat-shifts-w3b-from-chinese-european-rocket.html (November 22, 2010).

40. Thales Group, “ADU3200: Helicopter Air Data Unit,” July 8, 2008, at http://www.thalesgroup.com/Workarea/DownloadAsset.aspx?id=8909&LangType=2057 (November 22, 2010).

41. Baker Spring, “Obama Administration’s Ambitious Export Control Reform Plan,” Heritage Foundation WebMemo No. 3019, September 20, 2010, at http://www.heritage.org/research/reports/2010/09/the-obama-administrations-ambitious-export-control-reform-plan.

42. James L. Jones, “Export Controls for the 21st Century,” The Wall Street Journal, August 30, 2010, at http://online.wsj.com/article/SB10001424052748703959704575454313481209990.html (November 22, 2010).

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this launch failure investigation to its ballistic mis-sile programs.”43

For American export controls to be effective, theU.S. must determine which sectors, industries,technologies, and techniques the U.S. dominatesand then focus the revised export controls on thoseareas. As the Administration pushes to streamlinethe export control system, it should clearly state itsreasoning for subjecting certain technologies, sys-tems, and processes to export controls. This will, inturn, help manufacturers and designers to under-stand better what is and is not likely to be restricted.It will also allow regulators to apply export controlsmore consistently and effectively.

However, neither government nor industry shouldview such measures as somehow guaranteeing long-term U.S. dominance. Rather, the controls are ameans of retarding foreign access, including Chi-nese access. Real, sustained dominance requiresreal, sustained innovation and investment.

Keeping Pace with Advances. To this end,export controls must be dynamic, reflectingchanges in technologies and techniques. The lists ofcontrolled technologies should constantly evolve, asbefits a world of constant technological advances.For export controls to remain relevant and applica-ble to the most recent developments in technologiesand techniques, the lists of controlled items must beregularly reviewed, adding new items as needed andremoving old restrictions as they become obsoleteor counterproductive.44

This suggests that most restrictions shouldinclude sunset provisions and that the control listsshould be revisited on a regular basis. While a hand-ful of technologies are so sensitive that they may notrequire such provisions (e.g., nuclear weapon tech-nology), these will likely be the exception. By con-trast, information technology will likely evolverapidly, arguing for regular reappraisal of whichtechnologies should be restricted.

The Administration’s plan to consolidate the twolists of controlled technologies into one will helpin this regard, but how this will be implementedremains to be seen. The Administration needs totake a consistent approach in formulating the rulesfor the single list so that technologies and processescan be removed from the control list as they becomewidely available in the commercial sector, oftenbecause American competitors are already export-ing them.

Understanding China’s Military IndustrialComplex. One of the challenges of interacting withChina is the opacity of its structures and organiza-tions. The interrelationship between the militaryand civilian industrial bases—which entities areassociated or linked to other entities—is poorlyunderstood. Consequently, business relations withChinese companies are fraught with risk. A system-atic effort to gather and make available moredetailed information on the organization and struc-ture of China’s military-industrial complex wouldbenefit both U.S. industry and the government.This effort should pay special attention to busi-nesses that are linked to the military’s network ofresearch institutions. Only with this informationcan U.S. businesses engage Chinese corporations,while minimizing the risk of revealing key technol-ogies and procedures.

Moreover, such information would be invaluablefor other purposes, such as imposing sanctions andmonitoring technology and weapons transfers topariah states. Many Chinese companies, includingstate-owned enterprises, interact with unsavoryregimes, such as those in Sudan and Burma, but theyoften do so through a variety of fronts and subsidiar-ies. Sanction regimes can only hope to affect com-mercial interactions by identifying these variousrelationships and, ultimately, the decision makers.

This suggests a need to expand the budget for thedefense and intelligence communities to undertakelonger-term studies of both the Chinese military-

43. U.S. National Security and Military/Commercial Concerns with the People’s Republic of China, H. Rep. 105–851, 105th Cong., 2nd Sess., Chap. 5, p. 3, at http://www.access.gpo.gov/congress/house/hr105851/index.html (November 22, 2010).

44. Some technologies, especially those associated with weapons of mass destruction, will likely remain on any such list permanently, with or without regular reviews.

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industrial complex and its extensive ties to China’senormous commercial sector. In the face of aretrenching defense budget, it would be penny-wise, but pound-foolish, to reduce such longer-term analyses that are essential for both commercialand security purposes.

ConclusionThere is a broad-based consensus that the cur-

rent export control system is not simply flawed, butbroken. The Administration has chosen to address a

daunting task, and President Obama is to be cred-ited for this effort. It remains to be seen just how theAdministration will reconcile streamlining and sim-plifying the myriad regulations and bureaucracieswith maintaining the ability to limit the flow ofadvanced military technologies to the PRC, espe-cially given the structure of the Chinese militaryindustrial complex.

—Dean Cheng is Research Fellow in Chinese Polit-ical and Security Affairs in the Asian Studies Center atThe Heritage Foundation.